But as Andres Luts, Estateguru’s Chief Risk Officer, explains in this wide-ranging interview, the situation is almost always better than it looks at first, and Estateguru has a solid plan to make sure that late loans become paid loans sooner rather than later.
Q: Let’s start with the basics, when is a loan considered ‘late’ in Estateguru’s terms?
A: We basically use the same rigid definition as the banking sector does: if the borrower is in arrears with principal and/or with interest payment (the amount doesn’t matter) for more than three days, the loan is considered as late by our system automatically, with no exceptions.
Q: It seems there has been a substantial increase in late loans on the platform recently. Is this true, and if so, what are the reasons behind this increase?
A: I wouldn’t call it a substantial increase, but yes the late loan amount has increased since March of this year. If we look at the overall portfolio, then the late amount has grown from 10-13% to 16-19% and has been quite volatile during the last quarter. For the reasons behind this, we need to look at what is happening around us. The Ukrainian war coupled with increased inflation and rising interest rates has affected the macroeconomic situation, in which our borrowers operate, negatively. There have been supply-chain shortages and disruptions, refinancing delays and slower sale transactions. In these difficult times, some borrowers have also had tensions among their shareholders and/or management board members which have led to missed payments to our investors. We are in communication with our borrowers constantly to help them to resolve these issues.
Q: Is this a problem in specific countries? In other words, are there more late loans in some countries than others? Investors seem particularly concerned about the situation in Germany. Can you elaborate on the work being done there to rectify the situation?
A: Yes, some countries have higher late loan rates than others. These countries are Finland and Germany where the late rate has increased the most in recent months. Germany, as the largest and most important market, is currently receiving a lot of attention from our side. First of all, we have completely restructured the team there – we have a new country manager, new loan managers are coming on board, and for late loans, we are also hiring a new operations specialist. Currently, the local credit officer, the country manager, and I have contacted every non-performing borrower and work-out plans have been established to solve the late payments. Typically the work-out plan consists of an analysis of the reasons for being late, solutions with a timeline, revaluation of the collaterals, several calls and meetings with the borrower, and of course, the updated exit plan for our investors. If the borrowers are not willing to cooperate, then we have sent the cases to our debt collection partner HmcS who is actively pursuing the late payments. As a lender, we work with them to maximise the highest recovery on the loan possible.
Q: What steps does Estateguru take to encourage borrowers to pay when a loan is late? Describe the process, please.
A: First of all, our system starts to send automatic reminders by SMS and e-mail to the borrower. After a couple of days, our local operations specialist contacts the borrower by phone and reminds them about the missed payments. We also ask for the reasons and publish a loan update for our investors. We are of course mentioning termination of the loan contract and potential loss of equity for the borrower with a claim against them directly as most of them have provided personal suretyships. The mentioned aspects are usually enough to convince the borrower to cover the late payments or to find a solution in cooperation with us. If not, then until the loan becomes 30 days late the system sends reminders and our local operations specialist is dealing with the borrower. If this isn’t successful, then our Headquarters credit committee looks into the matter and, with the help of the local team, we make a decision depending on the country. For instance, in Latvia, most of the cases are immediately forwarded to our debt collection partner Conventus who has recovered many loans for us. In Finland, Spain and Portugal we try to establish a work-out plan or, if that is not possible, our default lawyer will send an application to the court. In Lithuania, the local operations specialist is doing the heavy lifting currently. In Estonia, we are using a local debt collection specialist and in-house lawyer to recover the late payments. In all the countries we start sending warning letters as soon as we see that there is no “soft” collection and cooperation possible and this is followed by termination of the loan contract and enforcement if the borrower doesn’t take us seriously.
Q: In which circumstances will EG offer the borrower an extension of the repayment period?
A: The application for extending the loan needs to have clear reasons. The borrower needs to update and confirm the exit plan, the collateral’s value needs to be checked by our team, the usage of funds needs to be in line with the purpose of the loan and, before extending the loan, the borrower needs to repay all the outstanding debts to our investors.
Q: Investors are often unhappy with the decision to extend, and would rather have the loan placed into default immediately. Can you explain why extending the loan is better for investors?
A: If the borrower fulfils all of the above-mentioned criteria, then I cannot support placing the borrower into default. Default means termination of the loan contract which leads to time-consuming enforcement procedures and probably an auction which could not be so profitable for the investors in terms of return. Just a side note – we have changed the terms for investors if the loan is being extended and now they can earn more interest in these cases. Why shouldn’t you extend the runway for landing for the borrower if it will help to receive the funds back in a smoother way versus not doing so and probably crashing the plane…
In short, it is more likely that working with the borrower usually ends in the best recovery position for the lender than a protracted enforcement process.
Q: Sometimes a late loan is refinanced on the platform. What is the reasoning behind this? Aren’t we just paying one set of investors with another set of investors’ money and postponing the issue?
A: We only allow refinancing of late loans on our platform if the borrower has already sent us payment proof that all the late payments have been paid. In most cases, we don’t want to miss the maturity period for our investors and consequently, we make an exception and publish the new loan. We are never postponing late payments using refinancing.
Q: Do you expect the situation to change significantly in the near future? Will the number of late loans decrease?
A: If I see the work we have put into decreasing the late loans, especially in Finland and Germany, then yes – the late loans will likely decrease in the coming 1-2 months. Due to holidays (lawyers, borrowers, buyers, refinancers, investors etc) it just has taken more time than I initially predicted. Patience, trust and staying calm are the main keywords here for our investors. Most of the employees at Estateguru are also shareholders or option holders of Estateguru – so the motivation and alignment of interest to solve late loan issues are in everyone’s mind if we are to continue with the crowdfunding business. We care about every loan! In addition, Estateguru is also in the process of working with institutional investors who will require Estateguru to maximise solutions for repayment.
Q: Has the increase in late loans had an effect on Estateguru’s broader credit policy? Has the selection of borrowers and collaterals become stricter?
A: We are always improving our credit policy based on the performance of the portfolio and analysis of late borrowers. With the selection of borrowers and collaterals we have been very strict throughout our history, but yes – when we analyse for instance new development cases, then cost analysis and borrower track record, financial stability and strength have become more important in the current environment.
Q: Some investors think that especially German valuations are inflated, nobody visits the properties and Estateguru needs to improve underwriting. What do you think about this opinion?
A: Of course, we have seen that German valuation standards and methods which are accepted in the market are too optimistic. We have had long discussions with top valuation market players and unfortunately, in some cases, they cannot change their methodology and inputs as this is mandatory by the law. What we have done in Germany is that we assess (or our consultants do) and always visit the collateral by ourselves if the valuation seems to be too optimistic or the valuator hasn’t visited the property due to the long distance. As investors have seen, we don’t publish our internal valuations, but publish the external ones, and make the adjustment to the value using lower LTVs. We could receive the same result if the market value would have been decreased. In the end, the loan amount against the collateral (risk per sqm for the investor) is the most important part of the credit risk. We also evaluate the collateral’s ability to repay the loan through this method and I want to point out that every borrower needs to have 10-30% of cash equity for the project to receive a loan.
Q: And finally, have you had confirmation from the sector that your underwriting is in line with the best practices in the financial sector? Do you have institutional capital on your platform to confirm it?
A: Yes, of course. We have a bank from Germany that has been investing on our platform for several years and I haven’t heard that there is negative feedback on our underwriting processes. We have taken the best practice from SME banking as our main decision makers have long-term experience in the sector. There are also smaller investment funds, banking professionals and private equity firms who are our long-term investors. We are also currently in the final phases with three larger banks who are considering opening new credit lines for us. The underwriting part and the teams involved have been analysed by them already and only minor adjustments need to be made to maximise the process.
Q: Thank you very much for your time.
A: My pleasure.